Integrating the Physical and Financial Supply Chain: Lessons From “The Wire”
I recently spoke at a few fall events, and at each conference, I shared my perspective about the priority I expect to see put on the financial supply chain throughout the remainder of 2013 and into 2014. In each case I began the discussion by talking about the lessons we can learn from HBO series, “The Wire.” This show is best described as a gritty crime drama set on Baltimore’s streets with the good guys (usually the cops and prosecutors) and the bad guys (everyone else).
There’s a line in the first year of “The Wire” that a detective tosses out in conversation that is especially relevant as we consider the intersections of current transactional procurement initiatives and the actual flow of payments. It goes something to the effect of this: “If you follow the physical trail of drugs, you get junkies and drug dealers. But if you follow the money, you don’t know where that will take you.” The implications are that following the flow of cash could expose internal mismanagement and even corruption.
The same could be said about following the cash in supplier payments, although one could argue that most procurement and A/P organizations have not yet even begun to look at actual payments as part of their investigation into opportunities. And that is because both are still focused on enabling and following the exchange of physical goods/services and associated transaction data – not actual payment flows.
In other words, payment and buyer/supplier cash flows today are really a black hole in which third parties (e.g., card issuers) have mastered the art of skimming off a couple hundred basis points of a small subset of the overall purchasing transaction environment. But for the vast majority of overall spend, payments are not at all managed for working capital and treasury benefit.
If there’s good news in this, it’s that change is coming, in large part because of the rise of e-invoicing. Consider the downstream implications of what payment visibility through electronic invoicing and document exchange approaches allow:
- Payment guarantees / assurance (e.g., approval to pay an invoice net of dilutions) for potential lenders compared with looser assurances today in receivables-based lending
- Adoption/uptake of receivables financing / early payment discounting beyond just larger suppliers
- Reclassification of discounts as revenue (in the case of certain discounting schemes)
And that’s just the start. Our bottom line: watch this space. It’s going to get interesting fast. And, in the words of the “The Wire,” once we begin to follow actual payment mechanisms, flows, and capital – even across the extended supply chain – who knows where such activity will take us and what sorts of opportunities such visibility will unearth.
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